Demand for defence stocks has taken off since Russia’s invasion of Ukraine in early 2021. FTSE 100 heavyweight BAE Systems, for instance, has seen its share price soar more than 90% since then.
It’s easy to see why BAE Systems in particular is a darling with the market. Its broad, market-leading product portfolio affords it top-tier status with major Western militaries, which in turn gives it exceptional opportunities to grow profits. The firm’s record order backlog (of £66.2bn) as of June underlines how white-hot demand for its services is.
Project execution problems are a constant threat that could impact profits here. But on the whole things are looking pretty good for the defence giant as global weapons budgets march higher.
BAE Systems shares have long been on my watchlist. However, latest trading news from FTSE 250 business Chemring Group (LSE:CHG) suggest this could also be a great way for me to get exposure to the defence sector.
Record orders
Chemring is a world leader in the field of countermeasures, a market in which it holds a share north of 50%. We’re talking about flares and chaff that planes and ships fire to throw off heat-seeking and radar-guided missiles.
The company also manufactures sensors and is an expert in cybersecurity and electronic warfare. And like BAE Systems, sales across its product ranges are shooting through the roof.
During the financial year to October 2023, Chemring secured a record £756.4m worth of new orders, it said today. This was up 37% year on year and drove the firm’s closing order book to £921.6m, the highest level for a decade.
Revenues rose 18% from financial 2022, to £472.6m, while underlying pre-tax profit soared 17% to £67.9m. This encouraged the company to hike the full-year dividend 21% to 6.9p per share.
Bright future
But can Chemring shares keep this momentum going? Considering its strong market position and the changing geopolitical landscape, I think the answer is yes.
Chief executive Michael Ord commented that “the outlook for global defence markets is increasingly robust, with continued growth expected over the next decade”. I agree with him.
Russia’s war in Eastern Europe, bullish comments from China over Taiwan and the South China Sea, and growing conflict in the Middle East is stoking fears of a new geopolitical alignment.
Both Moscow and Beijing are supercharging their defence budgets, meaning Chemring’s customers should follow, continuing to build their own arsenals. The company intends to expand to meet rising demand for its products, too, spending £120m to boost capacity and consequently annual sales by £85m a year from 2026/2027.
Good value
Today Chemring shares trade on a forward price-to-earnings (P/E) ratio of 16.2 times. As an added bonus it sports a 2.4% dividend yield.
I think this offers excellent value given the firm’s proven record of execution and encouraging trading outlook. I expect profits here to rise steadily despite the threat of supply chain disruptions.
